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11012011 November 2, 2011

Posted by easterntiger in economic history, economy, financial, gold, markets, silver, stocks.
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Current Positions  (No Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) – exit ; F(bonds) exit;  G(money market) – remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 11/01

46.15, 45.33, 54.22, -6.34

(3wks ago/2wks ago/1 wk ago/this week)

At today’s close, markets are back to where they were 7-8 weeks ago.

For reference to September, here are a couple of quotes from the 091211 report –

…what appears to be an inevitable next round of declines likely to begin by the end of the week and continuing further possibly into October.  The market is still in search of an ultimate short-term bottom level…

A little over two weeks after my statement above, the indexes broke down to a one-year low on October 4th.  Within hours of this one-year low, markets reversed by almost 3%, following a well-timed announcement from German Chancellor Angela Merkel and French President Nicholas Sarkozy.  In an effort to show unity for the euro currency and European financial integrity, they announced a ‘plan’ for ‘capitalizing Greek banks’ to help forestall a debt default.  This ‘plan’ had no details.  The ‘plan’ was placed on a schedule for announcement on 10/23.   In no less than 3 other announcements, this was repeated over the next 10 days, using basically the same language, and still, with no details.  World markets appeared to strengthen with each repeat announcement, in true ‘Groundhog Day’ fashion.

Based specifically on the ‘hopes’ for the outcome of this announcement, the casual observer would see that from that one-year low, the market would display a strong advance upward, until finally, the indexes broke through the upper bounds of a range that had confined it for over two months.  Market ‘bull’s could then claim that the trend of market weakness was over.  All of the historical reasons for 4th quarter market gains were reintroduced, including (1) the presidential cycle (where markets typically advance in the year before a presidential election as a result of market-friendly policy decisions), (2) increased mutual fund buying to improve year-end results, (3) resumption of the bull-market, and even, (4) the approaching European ‘deal’ was seen as proof that the reasons for the weakness since August were all behind us.

All this combined with the some indexes climbing back above their key 50-day and, for a short time, 200-day moving averages.  Market bulls were staking their victorious claims on the start of the traditional year-end rally.

The deal, when it was finally released, included European leaders agreeing to boost the European Financial Stability Facility’s firepower to 1 trillion euros ($1.4 trillion), set aside 100 billion euros for Greece and provide 30 billion euros in collateral for a debt swap that will give Greece’s investors new, lower-risk bonds at 50% of the existing bonds’ face value.

While appearing legitimate in form, some of these so-called details were seriously lacking in substance.  For example, the $1.4 trillion dollar facility was actually composed of less than $350 billion euros, subtracted by some funds already used for other purposes, then,  leveraged through a clause that only promised lenders a return of 20% of their contribution, in the event of fund failure.  In it’s essence, that would mean that you could claim your net worth is 500% of the actual value, by guaranteeing your creditors only 20% of what you owe them.  Secondly, participation by lenders was officially termed ‘voluntary’, or essentially, non-binding.

Nevertheless, the ‘euro-phoria’ fueled rally appeared to crown itself last Thursday with the overdue announcement, sending markets to levels not seen since August, and capping the largest October advance in over 20 years.  Few noticed that this speculative advance over 3 weeks (1) began from a one year low, (2) was fueled by more emotion than substance, and (3) resulted in numerous rounds of thousands of ‘short-covering’ transactions throughout the month, which are actually closing of bearish ‘selling’ transactions, by those who are anticipating lower prices. On price indexes, closing of these ‘bearish’ bets looks exactly like buying.

No one appeared to notice that other markets that confirm healthy stock markets, such as rising interest rates, or weakening safety trades in gold and silver, failed to materialize with the announcement.

With the end of a month of short-covering advances, finally, most of those ‘shorting’ the market are out. Fuel for the rally diminishes.  It’s at this point that real ‘buyers’ have to take over to continue the advance.  This has failed to happen.

This morning, the markets were shaken back to reality with the announcement by Greek Prime Minister George Papandreou that he plans to put the plan before a referendum for approval by Greek voters. European markets were briefly down as much as 5-6% overnight, while US markets were down as much as 3% for today.

Combined declines of yesterday and today have reversed all of the euphoric gains from the announcement and returned the indexes to within the nearly three-month trading range.  The absence of buyers or a return of sellers at this level threaten to return prices to the one-year lows from where they began on October 4th.

The safety trade sent bond prices soaring today, sending interest rates on the 30-year treasury bond back down below 2%, a level that affirms the viability of a concern for protection of capital, rather than one of capital appreciation.

***The Weekly Momentum Indicator is a strength measure of the S&P100, the largest 100 stocks in the U. S., in terms of market capitalization (share price of each of the 100 stocks times the number of shares available to the public).  The WMI is the difference in the S&P100 average opening price for each of the past three Monday mornings and the average closing price for each of the past three Friday afternoons.  This detects upward, sideways or downward movement of the overall market, since the markets generally move in synch from one index to another, and correlates very well with identifying opportunities for reward/gain and for situations for risk/loss in all equity indexes.  Rising numbers from the prior week are positive opportunities, while falling numbers from the prior week are avoidance opportunities.  I have a weekly, fourteen-year history for this indicator at the time of update in this report (11/01/2011).***

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